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Lessons from the Sears Bankruptcy

Until recently, Sears department stores have been a mainstay in home and personal retail shopping for many consumers, but recent financial woes have threatened its continued existence. Following a contested sale of the bankrupt retail chain to its chairman, Eddie Lampert, it appears that the company will continue for now. The battle to preserve the retail chain offers many lessons for bankruptcy observers.

Sears department stores have been wrought with financial issues for several years. The company went from having roughly $53 billion in sales in 2006 to taking a dive to less than $17 billion in 2017. Lampert ultimately blamed the decline on shifts in consumer spending and the rise of e-commerce—which has caused many brick and mortar mainstays to downsize.

Lampert spent years keeping Sears afloat through billions of dollars in loans from the Federal Credit Union (ESL), selling valuable real estate, and dismantling the stores’ exclusivity over large American brands. Some of the stores also suffered various maintenance problems, including crumbling walls, cracked floors, collapsed ceilings, and lack of working toilets.

Now, after a myriad of legal proceedings, Lampert has managed to keep 400 of Sears’ stores open and 45,000 of its workers employed. This remnant represents a fraction of the retailer’s former stature, having entered bankruptcy in October with 687 stores with 68,000 workers.

Lessons can be learned by companies of all sizes from Sears’ and Lampert’s struggles in navigating the company out of bankruptcy.

While many bankruptcy disputes are resolved through negotiation and compromise, occasionally disputes within the case must be litigated. Bankruptcy litigation moves at a very fast pace compared to other kinds of legal proceedings. It is absolutely imperative then that those involved with a bankruptcy case act quickly in order to secure a favorable outcome. A handful few of the areas that can give way to litigation can include:

Contested asset sales

Claim objections

Creditor preferences

Contract disputes

Disputes regarding governance of the debtor

Bankruptcy-related litigation proceedings often bear striking resemblances to traditional non-bankruptcy federal lawsuits, particularly with respect to discovery matters. In this regard, the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”) expressly incorporate a variety of discovery mechanisms from the Federal Rules of Civil Procedure (“Federal Rules”). These include rules relating to depositions, interrogatories, requests for production, expert witnesses, privilege, and other issues.

However, practitioners should be wary of these rule-related incorporations in the context of a “contested matter.” A “contested matter” involves a contested requested for relief in the context of the main bankruptcy proceeding. While discovery procedures in this type of proceeding are similar to those available in a traditional federal suit, they are not identical.

When litigating a contested matter, counsel must pay close attention to each Bankruptcy Rule that purports to incorporate a corresponding Federal Rule. In some instances, the incorporation is only partial in nature. For example, in contested matters, the Bankruptcy Rules incorporate only portions of Federal Rule 26, which addresses initial disclosures, expert witnesses, privilege, and other matters relating to discovery. Failure to take note of the omitted portions can result in a misunderstanding as to what is required of the lawyer and his or her client, and potentially provoke the ire of the bankruptcy judge. Unless you are a seasoned bankruptcy litigator with a detailed knowledge of bankruptcy procedure, it is good practice to review the applicable Bankruptcy Rules at the beginning of each contested matter you handle.

Houston, Texas Bankruptcy Lawyers

In the event your business is going through financial turmoil, our experienced bankruptcy lawyers can explain the available legal options. We have had the pleasure of representing creditors, debtors, committees, and trustees in a variety of litigated matters and understand that each case is unique. If you are currently involved in bankruptcy litigation or in a bankruptcy case that could turn litigious, please contact us so we can discuss your options.